Time for an Honest Conversation

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change_sofaBefore this election gets out of control it’s time to have an honest conversation.

You know all that stuff about the ‘fiscal space’? Is it €8 billion or €10 billion or €3 billion? Here’s the bottom line. There is effectively no fiscal space. We’re having a surreal debate over what is the equivalent to pennies (or 20 cent pieces) behind the sofa – though it was amusing seeing Fine Gael caught out on double-counting part of their estimate.

We’re going to be spending €350 billion over the next five years. There will be nearly €400 billion revenue. The fiscal space of €8.6 billion (that’s the base-line number) represents less than 2.5 percent of total expenditure and even less of total revenue. We’re having a 2 percent debate.

But it’s even less than that. There’s this little thing called inflation.   You may have heard of it though apparently some political parties haven’t. The Government estimates general economic inflation (GDP deflator) to be over six percent over the next five years. For current spending just to keep pace with inflation would mean an increase of nearly €4 billion. So that’s about half of the fiscal space gone.

But it’s even less than that again. The Government has assumed demographic pressures costing the state €2 billion (this means it’s not part of the fiscal space). These are demand pressures that occur without any policy change – rising number of pensioners, more demand on hospital services, rising number pupils numbers, etc. However, that €2 billion represents only ‘certain’ demographic pressures, not all. How much more? The Government’s not saying. But subtract more.

Taking all this into account, the Irish Fiscal Advisory Council estimated the fiscal space to be €3 billion and change. Even if it turns out be a little more, it’s not much.

But here’s something else to contemplate. The Government’s public investment programme is already factored into the base-line projections. So the increase in capital expenditure from the current €4.2 billion to €5.8 billion in 2021 is not part of the fiscal space (but this level of investment will still keep us at the bottom of the EU tables and well below our historical average).

However, the Government pulled a fast one in the capital programme. They claimed that over the next five years, there would be €3.2 billion in water investment – investment that would not be on the Government books since it will be carried out by a public enterprise company: our old friend Irish Water. However, the Government is in denial. Irish Water is on the books, thanks to the Eurostat ruling. Unless the government introduces charges based on use (fat chance), Irish Water will remain on the books. If there is to be any investment water and waste it will have to be on the books – about €3.2 billion between 2017 and 2021. That will come out of the fiscal space.

Let’s summarise: we have €8.6 billion in fiscal space

  • Subtract about half due to inflation
  • Subtract more (don’t know how much) for the full cost of demographic pressures
  • Subtract water/waste investment if we’re to have any

How much is left? Have a look behind the sofa cushions. (Note:  there is a little matter of an additional €1.5 billion from future recalculations of the fiscal space; good, we’ll need it).

Now let’s throw into this mix all manner of proposed tax cuts: USC, property, income, corporate, capital, whatever you’re having yourself (interesting that no one mentions cutting the most regressive tax – VAT).   And then there’s the other side of the fiscal coin expanding capacity in the health service, increasing resources for education, building tens of thousands of social housing units, increasing investment, bringing people out of poverty.

Let’s be clear: the politics doesn’t work, the math doesn’t work.

And none of this counts in the external environment.   The irony is that as Europe moves back to normalcy – higher interest rates, higher oil prices, higher exchange rate – Ireland will suffer. We’re benefiting from a situation that is risking another round of asset bubbles and busts.

Take one example: the Department of Finance projects the budgetary impact of higher interest rates. A one percent increase in interest rates will, over a five year period, lead to a fall of GDP of over two percent, a fall in tax revenue of nearly 2 percent, higher public spending due to increased unemployment benefits and an increase in the debt/GDP ratio of over seven percentage points. Now add on oil prices and a strengthening Euro; never mind the profound implications of Brexit.

Anyone talking about this? No.

Rory Hearne suggests that progressive parties and independents come together to present an alternative:

‘Imagine a press conference with Mary Lou McDonald, Gerry Adams, Stephen Donnelly, Catherine Murphy, Paul Murphy, Richard Boyd Barrett, Finian McGrath and Clare Daly – where they state that they have put aside their differences and have come together to offer the people of Ireland a real alternative government.’

It certainly is worth imagining. And the first thing they should do (and it would make an excellent photo-op) is to gather together all the party manifestos and policy documents and stick them in a bin. This would be the first step in having an honest conversation.  We could then talk about the real world and the difficult reality we are facing into.

Would that gather much support? I suspect it would. Poll after poll shows the majority of people don’t want tax cuts but, rather, investment and public services. There is a strong under-current of suspicion and even cynicism towards those who promise tax cuts and quality public services and fiscal stability, all to be delivered through numbers that don’t add up.

Is there an alternative? Yes. Is there a progressive fiscal space, combined with a spending policy, that forensically targets need and social repair? Yes. Are there policies that go beyond the fiscal space that can impact on people’s lives that do not require redistribution through Exchequer resources? Yes. My next blog will outline this.

But it all starts with an honest conversation.

I would imagine that people would welcome this – straight-talking from honest political forces. It certainly would mark a qualitative change from the usual election rhetoric. So let’s start that chat.

We have two weeks left.

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